Section 43B —
Deduct Only What You Actually Pay
Section 43B lets you deduct taxes, PF/ESI, bonus, bank interest and MSME dues only when actually paid, not when merely provisioned. Since FY 2023-24, clause 43B(h) disallows late payments to Micro & Small enterprises.
Section 43B allows certain business expenses only in the year they are actually paid — not merely accrued or provisioned. It covers government taxes/duties, employer PF/ESI & welfare-fund contributions, bonus/commission, interest on bank & institutional loans, and — since FY 2023-24 — payments to Micro & Small enterprises under clause 43B(h). For most items you keep the deduction if you pay before the ITR due date; but MSME dues have no such grace — miss the 15/45-day MSMED limit and the deduction shifts to the year of actual payment.
Section 43B — Items Covered
These are the categories where a deduction is postponed until the expense is genuinely paid, overriding the mercantile (accrual) method. Salary itself is not covered by 43B.
| Clause | Expense type | Payment deadline | If not paid by deadline |
|---|---|---|---|
| 43B(a) | Tax, duty, cess or fee payable to government | Before ITR due date | Year of payment |
| 43B(b) | Employer PF / ESI / gratuity / welfare-fund contribution | Before ITR due date | Year of payment |
| 43B(c) | Bonus or commission payable to employees | Before ITR due date | Year of payment |
| 43B(d)/(e) | Interest on bank, PFI or NBFC loans | Before ITR due date | Year of payment |
| 43B(f) | Leave encashment paid to employees | Before ITR due date | Year of payment |
| 43B(h) | Sum payable to a Micro / Small enterprise | 15 / 45 days (MSMED Act) | Year of payment · no grace |
Under the Income-tax Act 2025 these provisions carry forward as Section 37 (renumbered from AY 2026-27), with the same actual-payment logic.
A 43B disallowance is never lost forever. The expense simply moves to the financial year in which you actually pay it — e.g. March 2025 PF paid on 25 September 2025 is disallowed in FY 2024-25 and allowed in FY 2025-26. But the amount must be genuinely paid: a journal entry or provision is not enough.
Clause 43B(h) — the MSME 45-Day Rule
Introduced by the Finance Act 2023 (effective 1 April 2024, AY 2024-25 onwards), 43B(h) disallows any sum payable to a supplier registered as a Micro or Small enterprise (under the MSMED Act 2006) if it is not paid within the MSMED time limit. Verify supplier status on the Udyam portal before applying this.
| Scenario | MSMED time limit | Tax consequence |
|---|---|---|
| No written agreement | 15 days of acceptance / delivery | Deduction allowed if paid in time |
| Written agreement | Agreed period, max 45 days | Deduction allowed if paid in time |
| Paid after limit but before 31 March | — | Disallowed in accrual FY |
| Paid after year-end | In a later FY | Allowed only in FY of actual payment |
| Medium enterprise / trader | Any time | 43B(h) not applicable |
| Unregistered (no Udyam) supplier | Any time | 43B(h) not applicable |
43B(h) covers only Micro & Small manufacturers/service providers with a Udyam registration — not Medium enterprises or traders.
Unlike every other 43B item, the MSME clause has no proviso. If you breach the 15/45-day MSMED limit, the deduction moves to the year of actual payment even if you settle the invoice the very next day — you cannot rescue it by paying before the return due date. Align vendor-payment systems to the MSMED clock.
Large MSME vendor base? Get your 43B(h) exposure reviewed before the tax audit.
Talk to a Tax Expert →How a 43B Disallowance Plays Out
A trading firm has two March-2025 liabilities pending at year-end. One is employer PF; the other is an invoice from a Micro enterprise supplier (written agreement, 45-day limit). Here is how each is treated for FY 2024-25 (AY 2025-26).
PF paid 20 Sep 2025 (before ITR date)
MSME invoice paid 12 May 2025 (limit was Apr)
The PF is saved because it was paid before the ITR due date. The ₹5,00,000 MSME expense is disallowed in FY 2024-25 (added back to income) and becomes deductible only in FY 2025-26, when it was actually paid — a real cash-flow and tax-timing cost.
Section 43B in the Tax Audit (Form 3CD)
- Clause 26 of Form 3CD requires reporting of every 43B item — pre-existing liabilities paid/unpaid and current-year liabilities.
- The auditor cross-checks PF/ESI challans, GST/TDS payment dates and MSME ageing against the payment deadlines.
- For tax-audit cases the ITR due date is 31 October (extended to 30 September of the AY for many recent years) — confirm the current year's notified date.
- Reconcile all Micro/Small vendor invoices open on 31 March against the 15/45-day limit before finalising accounts.
Section 43B only affects taxpayers on the mercantile (accrual) system — companies, LLPs and most firms. Cash-basis taxpayers are unaffected, because they already deduct expenses only when paid. Salary, being outside 43B, remains deductible on accrual.
Section 43B — Frequently Asked Questions
Related TaxClue Services
Related income-tax guides
Get Section 43B & 43B(h) Right Before Your Tax Audit
From PF and bank-interest timing to the MSME 45-day trap, TaxClue's CA-led team reconciles your 43B position, prepares Form 3CD disclosures and files your business ITR — 100% online, across India.